China: A giant in transition

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For most of the past 40 years, investors, policymakers and interested observers have become used to the idea of China as a fast-growing, emergent economy, well on its way to achieving middle-income status, with every hope of continuing along a path of resounding economic success.

Recently, however, a different story has surfaced. This one portrays China as stumbling badly, weighed down by long-term challenges related to excess debt and investment, an aging population, the end of globalization, and the adoption of policies inside and outside China that may frighten off investment and consumption.

In our view, the truth about China is neither as optimistic as some had earlier believed, nor as pessimistic as is currently fashionable. Rather, the central narrative is one of China in transition. China is shifting from an economy underpinned by extraordinarily high and probably unsustainable rates of savings, investment and debt accumulation to something else.

Such a transition is not easy, but it is also not unusual. At similar stages of their development, other countries, including the United States, Japan and various successful East Asian economies, witnessed something similar.

In this paper, we try to better understand how China is in transition and offer some insights about how investors should anticipate change. We consider the following scenarios:

• The middle kingdom evolution: What’s shifting beneath the surface?
• Decoding China’s success
• China’s hurdles: unmasking major challenges
• Unleashing the dragon: Exploring opportunities
• How should investors judge opportunities and risks in China?

Whether investing in China directly or into themes that are linked to China’s economic prowess, the set of opportunities and risks related to China investment strategies is fundamentally shifting. What has worked in the past may not be so fruitful going forward. But fresh opportunities are also arising.